Should I buy or lease a car??

Unless you absolutely MUST have a new car right now (or as soon as humanly possible), I’d say buy a slightly older one and save a small fortune. If you will buy a new one anyway, then it might be a different ball game depending on your circumstances.

I love cars, really I do but they can be a huge expense especially if you “just pay monthly” for them. Have you ever asked how much interest you are really paying? How much money every year goes in interest or is lost on a lease?

A few years ago, I was doing a lot of engagement type roles and I got a bit too caught up in the appearances game so I decided to buy a nearly new car from an actual garage (I’m so embarrassed!). Massive departure for me to be honest but I went there anyway. I spent quite a bit of time with the salesman asking him how much the % interest was on the finance he was offering me, he didn’t know, his manager didn’t know and they both had to go away and check. He just kept telling me that it was £189 per month; that was it. He said just come back in 3 years for another nearly new car and we’ll use this one as part ex and you just keep paying the same amount.

I really wanted to know given how much the car was worth now and its value in 3 years and the interest you will charge me, how much money will I be losing over 3 years? He looked at me as if I’d just started speaking Greek, he honestly didn’t understand the question and just reiterated that it was £189 per month.

This was a bit of an insight for me, was this how most people bought cars? They walk into this lovely shiny showroom with “free” tea and coffee with no though to the fact that all this extravagance is paid for by poor saps like them (and me!) who buy into the experience of getting a new car. I mean seriously, take a step back and look at this.

You’re buying a car worth, let’s say £9,000. This same spec of car would cost you about 10% – 20% less privately or from a smaller garage, you could pay £100 to get it checked independently, buy a 12 warrantee from any number of providers and still get a reasonable holiday out of the difference.

On top of this you take out the “finance option”. Nice and simple sign some papers, pay the monthly direct debit and you’re off. This is still a debt on your credit report and if, like this particular garage their finance runs at 18%pa, you’ll be paying out all that money every month and for the first few years pretty much all you will be doing is paying off the interest, you probably won’t even keep up with the depreciation on the car!

So you drive away in your shiny [nearly] new car and 12 months later decide that you don’t really want or need it so you try to sell it……. And it’s now worth £7000 and you still owe the finance company over £8k. So you’ve paid out £2268 over the year in payments, an extra £1000 to the finance company on top of what you managed to sell the car for and you have nothing to show for it.

Is £3268 in 1 year, not including tax and insurance an acceptable cost of motoring? If you go for a new car or a more expensive one the situation looks way worse, but because everybody does it, we consider it “normal” and we all follow suit.

Even if you can comfortably afford the monthly payments right now, can you really afford to swallow the cost overall? This is especially relevant if you are still young as even a small sum invested now and not touched or added to until your retirement could be a massive sum.

Save from 21 to 30, then stop. You will have a bigger pension than a saver who starts at 30 and stop at 70. The miracle of compound interest, Einstein’s ‘eighth wonder of the world’
The Telegraph

If you are in your 20’-30’s, please do read the above article. This same principle is cited in a many books but this pretty much sums it up. Anything you invest early really does make you thousands extra in the long term.

Albert Einstein called compound interest the “eighth wonder of the world”, adding: “He who understands it earns it; he who doesn’t pays it.”

Did you know that a 20 year study of millionaire behaviour showed that they mostly bought second hand cars? I guess it comes down to a bit of soul searching; why do you need the new car? What’s more important to you, driving a new (ish) car because it looks better to everyone else, or getting to a debt free future where you can invest your money and potentially become free of the rat race sooner?

I’m not suggesting you buy an old banger that isn’t reliable but there is some middle ground here I think. Aside from getting the car checked out before you buy it you can also get a warrantee insurance policy regardless of the cars age so that you won’t be in fear of something major going wrong that you can’t afford to pay for. I realise this is all extra cost but I’m willing to bet that the vast majority of the time, you will still be A LOT better off long term.

The thing is, if you want it, have it, but don’t pretend you can afford it if you really can’t. Just decide what is more important and make your choice. Be happy driving a more cost effective car and have the knowledge that the guy next to you thinking he’s the big man in a range rover evoke is probably in debt because of it and will have to do that job he hates) and is probably compensating for with the car) for way longer than you.

Who will really be the big man (or woman) in 10 years? You; retired with no debts and time to really do what you want with your life, or him still paying for the now rather old car that means he has to work a good few more years than you do?

This concept is explored in great detail in “the millionaire mind-set” (Which is definitely worth a read or a listen BTW). Of the great many millionaires surveyed for this book over a 20 year period, it was clear that buying new cars was not a habit of the very wealthy, in fact it was found to be a much more common pastime in respondents with a high income and very small net worth, i.e. those that did not have any sustainable wealth. That in itself if very telling I think.

Another point to consider if you have car payments and other expensive debt is the opportunity cost or “what if” scenario. What if you had a less expensive car that was non the less reliable but wasn’t costing quite so much in interest payments, how much interest would you be saving on your other debts if you put this money towards paying them down instead? (12 min watch)

I will have to add a caveat to this rant for those of you who may satisfy some additional criteria; these include but are not limited to:

  • You can earn / make way more on the cash you keep in your hand by not paying for the car upfront, than you lose in a lease or purchase arrangement and you are buying the new car regardless of what anyone says to you.
  • You’re a high rate tax payer and / or business owner with the ability to offset the costs in a way that reduces your tax burden and makes it worthwhile – and you are going to buy it anyway.
  • You don’t have any debt costing you money elsewhere and you’re set for retirement already so don’t need to save any extra money and you’re going to buy a new car regardless.

Your individual circumstances will of course be pretty much unique to you and there will be cases where a lease or maybe even a purchase plan actually works out but PLEASE run the numbers every way you can before you commit to anything, especially if you have other debts and you just “want” a new car because you need to feel better about your life.